Any questions: Rentals May 2011

Saturday, April 30, 2011

After six years living in Lanzarote, my husband and I are selling up and moving back to the UK to be closer to our new grandchildren. We will need to convert €170,000 (£148K) and are aware rates are good at the moment. It could be up to a year until we've sold and ready to convert however, so do we have any options or simply hope the rate is still good when we're ready to convert?"

The Euro to Pound rate is indeed very favourable at the moment, close to a five-month high and 20 per cent better than when you purchased your property. So due to exchange rate fluctuations alone you are gaining over £30,000 more than you would if the exchange rate had not changed since you purchased. Despite the rate being favourable now,this may not be the case when you come to convert your euros. Most forecasts suggest that in the medium to long term Sterling will strengthen, meaning less pounds for your euros. There is a way to take advantage of the current rate though, even if you have yet to sell...

A forward contract allows you to fix today's exchange rates for a period of up to two years, with a 10 per cent deposit payable at the outset in euros or pounds (€17K/£15K). So, if you have funds available to enable you to lodge this deposit, you can take advantage of the current rate and know how much Sterling you will have upon your return to the UK. You can then convert your euros at the agreed rate at any time within the two-year period once your property has sold, safe in the knowledge you are protected against any adverse movements.

You do pay a slight premium to lock into a forward rate, compared to the price you would achieve if you had the funds available now (the spot price).

However, you can complete on the contract early (once you have sold) at no cost, and the difference between the spot rate and the forward rate are marginal compared to the saving that will be made if the rate moves as forecast. It should be noted that a forward contract doesn't guarantee the best price within your timeframe, but fixes today's price to protect against the rate moving against you.

World events causing exchange rate volatility

Currency markets are affected by events ranging from the commonplace, such as central bank meetings, interest rates and unemployment figures, to unimaginable events such as the natural disaster in Japan. In recent weeks world events have had the biggest impact on the currency markets with natural disasters, political unrest and acts of war all affecting exchange rates.

The tragic events in Japan in March shocked the markets, with the biggest earthquake in the country's history coupled with the devastating tsunami and nuclear emergency continuing to cause volatility in financial markets across the world. Events like this are by their nature unpredictable, as are the effects on exchange rates. Markets hate uncertainty and as the magnitude of the disaster became clear, investors rushed to move away from risky assets. Sterling is perceived as a risky asset, and weakened accordingly. Stock markets also fell, with 'safe haven' currencies such as the US Dollar and Swiss Franc strengthening.

Elsewhere, political unrest in the Middle East and North Africa has also had a big impact, with pro-democracy rallies in the region resulting in political instability in Tunisia and Egypt, with Yemen and Bahrain also coming under close international attention. As events unfolded it became clear that Libya in particular was facing significant challenges, and as world pressure mounted against the regime, sanctions were imposed on the country. As the region's largest oil exporter this caused a big rise in the price of oil.

The USA is a large importer of oil and the higher price of crude meant that the country would have to spend more on imports and this has significantly weakened the US Dollar. In fact, the Pound versus US Dollar rate hit a 14-month high. Conversely, Canada as an oil exporter benefited from the higher price and strengthened, becoming more expensive to purchase.

So while the usual market movers that can in part be predicted and forecasted, such as interest rate movements, will continue to affect the currency markets, other unpredictable factors such as natural disasters, political unrest and acts of war will also continue to play their part.